Capital Restructuring Plan
Issues:
• The Company is in a serious state of cash deficit and has no line of credit with any bank. The bank (BMO) is currently not bouncing
cheques, but has warned several times to do so. The current overdraft balance is approximately $300,000 and we have $580,000 of
payroll to clear by Friday, August 26 and several other urgent dues, including homestays and commissions of values greater than
$500,000. The current cash inflow will be much less than required and may push the bank overdraft up to $1M.
• The Bank (BMO) wants to be out immediately and may initiate CCAA proceedings to liquidate the Company’s assets.
Current bank loans are:
- Acquisition loan = $8.9M; proposed to be discounted, which is subject of negotiation with the bank
- Demand credit = $2.7M
• The Company is turning around but needs between $7M to $9M to pay-off the bank and bring in enough working capital to continue.
• No one is willing to invest that kind of money with the current capital structure of the Company. All potential investors have assigned
either no or very little weightage to the funds invested before 2016.
Management proposal:
• To avoid liquidation proceedings by the bank and a complete loss to the existing investors, Management proposes to clean up the
balance sheet and make investment in the Company more attractive for the new investors.
• This will be achieved by restructuring the Company’s existing capital structure by discounting the values of pre-2016 notes and long
debts by 90%, and issue common shares @ 2 cents for the remaining values of 10%. This will result in settling all pre-2016 obligations
and cleaning up the balance sheet.
• Management believes that with the new capital structure and the business turning around the share price will go up to 20 cents before
the end of 2017. This will provide an opportunity to the existing investors to get the full values of their investments back.
• The current fair market value assessment of the preferred shares based on settlement notion is as follows:
Series A Preferred Shares
• Face value of 1 Preferred share is $10 with 83.33 warrants exercisable @$0.12; total 773,299 preferred shares and 64,022,351 warrants
outstanding; book value of $7,732,990 (including $50,000 of incentive to employees); issue dates between July 6, 2015 and October 29,
2015; dividend of 9%, accumulative, and have mandatory redemption privileges to redeem within 24 months of issuance.
• The shares have priority over common stocks but will be under debt instruments during liquidation process.
Internal assessments:
• The Company has not paid dividends since issuance of the preferred shares and the warrants are worth ‘$0’ considering current
common share price of $0.02 and 6-months’ average price of $0.02 and 1-year average price of $0.03.
• The Company incurred $20M and $46M of net losses in 2014 and 2015 respectively. During 6 months ended 2016, the Company
incurred $7M of net loss.
• The Company was cash negative by $6M and $13.6M in 2014 and 2015 respectively. During 6-months ended 2016, the Company burnt
another $5M of cash.
• The operational cash shortage will likely continue until capital restructuring is completed to restore Company’s financial footing and
reputations.
• Principal repayment is highly unlikely.
• The preferred shares rank below convertible debentures and senior debt meaning in case of insolvency, the senior debtor will get
priority over all proceeds from sale of assets.
• The proceeds are not expected to be higher than BMO’s senior debt of $11.6M and other liabilities of the Company.
Conclusion:
Based on above, the fair value if preferred shares is worth $0.